Diageos softly-softly approach could pay dividends in Asia

Diageo's softly-softly approach could pay dividends in Asia

Diageo's decision to partner with Vietnam's local spirits hero, Hanoi Liquor Joint Stock Co, looks like a shrewd move, even if the financial benefits start at a trickle.

Diageo is demonstrating its willingness to take a softly-softly approach to some of Asia's most promising emerging markets. It is unusual for the drinks giant to forego a controlling stake in a shared asset, but, so far, it is not proving too proud to heed the lessons of others. Already, we have seen that the Smirnoff distiller has not attempted to bulldozer its way into China, as some might accuse other companies (The Coca-Cola Co?) of doing.   

We saw another example of the strategy yesterday (26 January), when Diageo announced that it would acquire a 24% stake in Vietnam's leading branded spirits producer, Hanoi Liquor Joint Stock Co (Halico), for GBP33m (US$52.2m).

As well as placating potentially-volatile authorities in a one-party state, the 'local' strategy also hands Diageo an opportunity to reach consumers of 'local' spirits - in this instance, Vodka Hanoi. Cognac may be going great guns in China and Scotch whisky the same across South East Asia generally, but most consumers in these markets still drink local.

Diageo's deal with Halico is not quick-win but a foothold for the future.

Early financial gains are likely to be minimal, as analyst group Evolution Securities pointed out in a note yesterday. "This is a small, bolt-on deal for the group, which, for now, will have little impact on either Diageo's financials or route-to-market in Asia," it said. "However, we suspect there may be scope for closer co-operation, especially in distribution, in this fast-growing alcohol market in the future," Evolution added.

Vietnam's spirits market holds considerable growth potential, even if the profitability remains in a different league to established western countries. Market value is set to rise by 6% annually between 2009 and 2014, to US$607m, according to market research group Datamonitor.

Market volume is set to rise by 3.6% annually over the same period, to 41m litres. Meanwhile, the International Monetary Fund said this week that the GDP of the ASEAN-5, which includes Vietnam, is set to increase by between 5.5% and 6% in 2011 and 2012.

Anyone who takes an interest in emerging markets will be used to seeing figures like these, of course. What is most interesting is Diageo's strategy to capitalise on the potential. Inevitably, there are risks with joint ventures in emerging markets, as Danone would tell you, but Diageo's careful approach could turn out to be a big winner.